Spanish elections in the balance again, but markets have so far proved immune

December’s Spanish national election resulted in failed coalition negotiations that left no party able to form a government. June’s re-run looks to be heading for a similarly uncertain outcome. Spanish equity and debt prices have so far appeared to be immune to the political havoc in the country.

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anonymous

2016-06-06T12:13:00+0100

Source: Bloomberg

Spain will return to the polls for new national elections on 26 June, after December’s election resulted in no political party gaining enough support to form a government. The People’s Party (PP) ended up with the most seats, gaining 123 of the 350 seat parliament, followed by the Socialist Workers’ Party (PSOE) with 90 seats and anti-austerity party Podemos with 69 seats. The liberal and centrist Ciudadanos, or Citizens, party won 40, with the remainder going mainly to nationalist parties.

The Spanish electoral system requires an absolute majority of the House – 176 votes – to be able to appoint a Prime Minister. The two biggest parties have dominated Spanish politics since the early 1980s, but they both suffered heavy losses in December’s election as the impact of the financial crisis and years of subsequent austerity fractured the electorate. It is also possible to form a government with a simple majority — that is more votes for than against.

In December, the People’s Party and Ciudadanos had 163 seats combined, below the number necessary for an absolute majority, while the sum of the PSOE, Podemos and the post-communist Izquierda Unida party was 161. After various negotiations, the PSOE and Ciudadanos with 130 votes combined tried twice to form a government by simple majority, but this was blocked by the People’s Party, Podemos and other nationalist parties.

On 3 May, Spain’s King Felipe VI was forced to dissolve parliament and call new elections.

Despite those months of failed negotiations, uncertainty and absence of government, Spain’s equity and debt markets traded in line with movements seen in other European markets. That suggests the local markets are immune to political risk.

Spain’s Ibex 35 index (blue line) has tracked movements in the Eurostoxx 50 (black line) over the past six months.

The Spanish economy also has maintained the same growth rate as that seen in the last quarter of 2015. Gross domestic product grew 0.8% in the first quarter of 2016.

Recent surveys suggest there may be little change in the political makeup of parliament after the new elections. Podemos and the post-communist Izquierda Unida party have reached an electoral alliance agreement, which can benefit them because Spain’s system of distributing seats favors larger parties.

The surveys suggest PP could repeat December’s result with between 120 and 130 deputies. PSOE could lose some of the 90 seats it won in December, while Podemos could add to its tally of 69. Ciudodanos is set to repeat its tally of 40 seats. This would leave the sum of the main blocks from the left and right of the political spectrum on more or less the same terms.

PSOE could be in a key position in any negotiations following the elections. However, the spread between PSOE and Podemos deputies in parliament will likely shrink this time, meaning Podemos would be in a stronger position to make demands. That may make it harder for PSOE to reach a coalition deal with them. It is possible that PSOE facilitates a coalition of liberals, with the conservative PP and Ciudodanos parties deciding to abstain.

It appears unlikely that Spanish equity and bond markets will show any more nervousness about the political situation during the new negotiations than they have done during the last six months of no government.

The biggest risk to the markets would be the formation of a government with significant amounts of power for Podemos. But the likelihood of this scenario seems low at the moment.